1. SIBOS was last held here in Hong Kong in 1991. So it has
taken you 18 years to come back to Hong Kong. I wonder what took
you so long. A lot has happened here in this free and open
international financial centre in the past 18 years that ought to
have interested you enough to bring you back here earlier. I can
think of, for example, the establishment of the Hong Kong Monetary
Authority in 1993! Seriously, financial globalisation and
innovation have made life here, where there is a high degree of
market freedom and ample liquidity, rather challenging, perhaps a
little too challenging for the financial authorities. And on a
couple of occasions we had to take controversial, remedial action
to safeguard monetary and financial stability. On top of this,
there were of course the market excitement, or interestingly the
lack of it, surrounding the reversion of sovereignty; the
inevitable bursting of the housing bubble that did not, I repeat
not, lead to a collapse of the financial system; the construction
of our multi-currency and multi-dimensional financial
infrastructure that made RTGS DVP and PVP possible for anybody
wanting to manage risks more properly here in this time zone; and
the emergence, more recently, of the RMB offshore market here that
is also serving as a laboratory for testing financial
liberalisation on the Mainland, a development that is of increasing
importance to global finance. But it is still a great pleasure,
after all these years, to welcome SIBOS back to Hong Kong.
2. I understand that the objectives of SIBOS this year are
"learning lessons from the past, exploring the post-crisis
landscape and paving the way for future innovation". These are
indeed important objectives, having regard to the current state of
global finance. Indeed, for the past couple of years they have been
occupying much of the time of the financial authorities and the
industry. The G20, the Financial Stability Board and its Standing
Committees, and the Standard Setting Bodies are all working hard
and there is no lack of specific subjects to address - the Basel
capital framework, the accounting standards for valuation and for
off-balance sheet activities, capital requirements for trading
activities, compensation practices, central counterparties,
principles for the oversight of hedge funds, supervisory colleges,
cross-border cooperation on crisis management, oversight regimes
for the rating agencies, etc, etc. Some of you may already be
suffering from meeting fatigue and, like me, somewhat sick of these
subjects already; so I do not want to add to your agony. I am
fortunate to have had the privilege of setting up and heading a
central banking institution over a relatively long and exciting
period in a significant international financial centre that is free
and open. And as the time for retirement draws near, after sixteen
and a half years, I do have a few reflections, from a rather
different perspective than those of present pre-occupations, which
I would like to share with others. They are nothing profound or
technical; just a few issues that I have found particularly
challenging over the years.
3. The first concerns a conflict. This is the
conflict between the private, particularly short term, interest of
financial intermediaries in maximising profits, and the public
interest of effective financial intermediation that provides
crucial support to the economy. This conflict has not been talked
about much, if at all, even in central banking forums; but it is, I
am quite sure, one important contributing factor to the making of
financial crises. Financial intermediaries are often, and rightly
so, rewarded handsomely for their innovative efforts, which, it is
claimed, bring a higher rate of return for those with surplus money
and a lower cost for those in need of money; in other words, a
narrowing of the intermediation spread, or greater financial
efficiency. But there is an internal contradiction in this
phenomenon. Greater profits for financial institutions and larger
bonuses for those employed in them mean, to me at least, a
widening, rather than a narrowing, of the intermediation spread; in
other words, lower financial efficiency.
4. Yet we do observe greater profits and larger bonuses in the
financial system along side (probably apparent) improvements in
financial efficiency. For example, the innovative effort variously
described as "securitisation", "originate-and-distribute", and
"credit risk transfer" did raise the rate of investment return and
lower the cost of credit. The explanation for this, if I may
venture a guess, is in the time dimension. The observed narrowing
of the intermediation spread comes at the expense of, or presages,
a future, possibly sharp widening that often occurs in the context
of a financial crisis. Indeed, we have just had a case of
co-occurrence of highly remunerated financial innovation and a
temporary narrowing of the intermediation spread that was built
upon, among other things, a serious erosion of credit standards. We
all know how this ended; rather miserably with investors losing a
lot of money and borrowers finding credit expensive and hard to
come by, and consequently considerable damage to the economy.
5. How do we deal with this conflict? I am afraid I have no
answer, other than always to be alert to it and be ready, as
protectors of the public interest (in terms of maintaining
stability, upholding integrity, promoting diversity and efficiency
in financial intermediation) to act whenever the private interest
of the financial intermediaries threatens to override the public
interest. But this is easier said than done, particularly when
financial innovation is often packaged and presented skilfully by
financial intermediaries as an effort to enhance financial
efficiency. Furthermore, in capitalist, free-market economies, the
authorities generally do not have a lot of influence over
innovation. The financial intermediaries often constitute a strong
political lobby against regulation, arguing quite forcefully that
regulation stifles innovation and progress. And so, regrettably, we
have an environment that is often not conducive to the financial
authorities taking preventive measures to protect the public
interest. You have I am sure heard of the rather unkind and unfair
street talk that the US Treasury was being run largely by Wall
Street. I am sure it is not true but it conveys a misconceived
perception that perhaps we should not ignore.
6. I am not suggesting that the socialist-market economy model,
practiced for example on the Mainland of China, with considerably
greater influence over and ownership of the financial system by the
authorities, and therefore greater attention by operators within
the financial system to the public interest, has become the
superior model, although I noticed at least some involuntary
movement lately of the so-called Anglo-Saxon model towards that
direction. "Thou shalt lend", says the government to banks that
have received capital injections from the public purse. It is I
think a matter of degree, not so much in the ownership of the
financial system, but more in the legal and institutional framework
whereby those with the responsibility to protect the public
interest can exert the appropriate influence at the appropriate
time, whether it is through prudential supervision, conduct
regulation, the provision of safety nets or the design of crisis
resolution mechanisms.
7. My second issue is a dilemma. This is a
dilemma mostly for emerging markets - a dilemma between pursuing
financial openness and maintaining financial stability. I support
financial openness as a means of greatly extending the universe
within which the risk appetite of domestic savings and the risk
profile of domestic borrowers can be satisfied. Indeed, for
borrowers and investors of a particular jurisdiction, taking
financial intermediation into the international dimension should
lower borrowing costs and increase investment returns. And so
measures are taken by emerging markets in financial sector
development to enhance and eventually liberalise the international
mobility of investors and borrowers, and their funds, and the
international mobility of financial instruments and financial
institutions; in other words, they embrace financial
globalisation.
8. As we all know, there are risks to monetary and financial
stability associated with such mobility, and events in the past two
decades have indicated clearly that these risks are considerable.
Many have pointed out that financial openness has to be supported
by prudent macroeconomic policies and so financial openness serves
also to impose needed discipline on policy making in emerging
markets. I fear, however, that this is true only to a certain
degree, in that the discipline imposed by capital mobility on
emerging markets seems to be a lot tougher than that imposed on
developed markets. The small size of emerging markets relative to
the pool of international capital may be one reason behind this.
The greater volatility of international capital relative to
domestic capital is perhaps another. Also of concern is the
willingness of some emerging market jurisdictions, in a perhaps
doubtful attempt to attract the household names in international
finance to set up shop as part of their strategies to develop their
financial systems, to promulgate rules that may be unsuitable for
their domestic circumstances. This often results in structural
defects in the financial systems that are not conducive to the
maintenance of monetary and financial stability; for example,
regulatory gaps, low transparency and market concentration. These
defects also breed unethical behaviour. Indeed, free and open
emerging markets are considered by some as markets that can be
rather freely manipulated. They also call them ATMs.
9. But I still believe that financial openness outweighs the
risks of financial instability, and that the risks I mentioned just
need to be, and can be, managed, simply by being sensible in the
development of the financial system, reminding ourselves always
that the primary purpose of the financial system is financial
intermediation that supports the economy. Although it provides
employment for quite a number of people, including us, and profits
for a lot of capital, the financial system does not and should not
have a life of its own. Gradualism is perhaps a prudent attitude,
even if this means taking a little more time or appearing for a
time to be not as welcoming as the top players in international
finance would like. "Because others have it" is definitely a risky
attitude to take in financial development. And as developed markets
are going back to basics, a no-frills approach to financial
development may not be a bad idea. Financial openness does not mean
getting all the top brand names to set up shop in your backyard and
importing innovative financial instruments and practices. Indeed,
some of those innovative financial instruments may be toxic.
10. My third issue is a reality. The reality
here is that in finance, and perhaps in other areas, it is
difficult if not impossible to find a textbook perfect market,
where, for example, market participants are all price takers and
not in a position - and therefore not having the incentive - to try
and move markets in their favour. Fear or greed, fed by information
or misinformation, stoked by manipulative or predatory behaviour by
a few, often takes hold, to such an extent as to produce volatility
well beyond prudent risk management parameters, threatening a
complete meltdown of the financial system or other forms of
systemic breakdown.
11. As supervisors of financial institutions and regulators of
financial markets, our duty is to do our best to prevent these
situations from occurring, but we have to accept that we too are
not perfect, particularly when supervision and regulation at the
national level have their shortcomings in dealing with financial
institutions and markets that are already global in nature.
Whatever combination of market freedom and regulatory oversight one
cares to design and try out, markets do fail, sometimes inflicting
huge damage to the public interest, defined in terms of ensuring
that the financial system operates effectively in support of the
economy. The damage to the public interest could well be much
greater than that arising from not allowing the free market to find
its equilibrium on its own.
12. We certainly hope that these situations do not occur too
often. But when they do, very simply there is a need for
intervention to put things right so that the financial system can
continue to function to support the economy. But market
intervention is always controversial. We learned that in 1998 and
many of our critics then learned the same more recently. The
purists wave the free-market banner and condemn any market
intervention, pointing out the moral hazard involved, the cost and
the unfairness of intervention. Many become instant experts in
managing financial crises and alternative courses of action
proliferate. Politicians, whether or not they have the authority
over the decision to intervene, want to satisfy themselves that
intervention is justified and what is proposed is the right way
forward. Often the process of arriving at a consensus takes time
and meanwhile the problem worsens and the effectiveness of the
actions to be taken is eroded.
13. I believe therefore that those responsible for the
maintenance of monetary and financial stability should have the
necessary emergency powers to do what is required independently and
promptly. There is of course the need for transparency and
accountability when exercising these powers to ensure appropriate
checks and balances. At a time when many jurisdictions and
international forums are reviewing the financial regulatory
structure, the ability or inability of the financial authorities to
take unusual action, independently and promptly, to protect the
public interest should be addressed.
14. My fourth and last issue is an involvement.
This concerns the extent to which the authorities should be
involved in the development of the financial infrastructure. I am
sure you are aware of the huge amount of public money spent in all
jurisdictions in the development of the physical infrastructure,
building highways, bridges and airports to take people and goods
from one place to another safely and efficiently, thus facilitating
the conduct of economic activities for the benefit of all.
Authorities, however, seem to devote only disproportionately small
amounts of resources to the development of the financial
infrastructure to move money and financial instruments from one
entity to another safely and efficiently for the purpose of
enhancing financial efficiency that promotes economic prosperity.
To some extent, the development of the financial infrastructure can
be left to the market, with SWIFT being a sterling example of
private sector initiative in this area. But many of the important
elements of the financial infrastructure are public goods, the
provision of which, in a form that serves the public interest best,
may not be financially viable for the private sector. Furthermore,
the conflict I mentioned earlier often comes in, affecting the
willingness or the enthusiasm of the financial intermediaries to
develop and use a financial infrastructure that promotes financial
efficiency. I believe this is one of the main reasons why X in T+X
in the settlement of some financial transitions is still a number
other than zero, or why T+X is still not replaced by RTGS DVP even
though the technology to do so has been available for some
time.
15. Very simply therefore there is a case for the authorities to
get involved, as a developer or a service provider, when a private
sector solution that is in the public interest is not available.
And the public interest is not just in the enhancement of financial
efficiency but also in the limitation of contagion and the more
effective achievement of financial stability. The Hong Kong
Monetary Authority has devoted much effort to the building of the
financial infrastructure of Hong Kong. I can assure all of you that
it is well worth the effort and the amount of public money involved
is really quite modest, although it may take a little time, and
some appropriate prudential guidance concerning, for example, the
management of payment and settlement risks, to convince potential
users before traffic in these financial highways builds up.
16. Allow me to end this address with an advertisement. In Hong
Kong we now have RTGS systems for the Hong Kong dollar, the US
dollar, the euro and the RMB. They are all linked together to
achieve cross-currency PVP in our time zone and they are linked up
with our debt-clearing system to achieve DVP. We welcome external
users accessing these systems for their payment, clearing and
settlement needs, through directly becoming members of these
systems, indirectly using the services through corresponding
relationships with the existing members, or having them linked up
with their own payment, clearing and settlement systems. Some of
you may, for example, be wondering how you could use the RMB for
trade settlement, something that is being promoted by the Mainland
authorities. You can, of course make use of correspondent banks on
the Mainland, and therefore pay or receive RMB arising from imports
and exports there, where the money stays. But should you wish to
pay or receive RMB offshore where there is greater freedom in the
mobilisation of the relevant funds, albeit for the time being there
is still a dearth of RMB denominated financial instruments, you can
do so in Hong Kong.
17. Thank you and I wish this year's SIBOS great success.
